The following will likely not make much sense if you haven’t read the preceding relevant discussion, most of which can be found here. The core issue addressed is whether the decision of many corporations to strongly support Black Lives Matter while staying silent on the riots should be insulated from scrutiny by the business judgment rule. I have put my original comments in bold, responses by Idriss Z in italics, and my further responses in plain text. In addition to comments on the substance of this post, I hope readers will let me know if the formatting can be improved.

“Are the corporate executives making these decisions doing so in accordance with their fiduciary duty to become informed of all material information reasonably available (which requires consideration of the impact of these decisions on the bottom line)…”

IZ- Of course they are! Many cases have held that companies can acquire much goodwill and better pr from such community action (examples have included charitable donations and philanthropy to local schools, including HBCUs). Or a more “hip” take: African American culture might be the most profitable marketing material source in the world, people all over the global love the various arts that come from our (unfortunately) marginalized communities.

You provide good reasons for concluding the decision is rational, but that does not tell us whether it was properly informed. Those are two different inquiries. For example, if the type of polling data I set forth in my prior comments (from here) was available, then that likely should have been considered. Charitable contribution cases are best treated separately from cases involving ordinary business decisions.

“…, or are they simply acting on the basis of some echo-chamber supported confidence in the obvious rightness of their beliefs”

IZ- One of the best aspects of the American system compared to those of the English commonwealths in my estimation is the lack of mental probing done to business decision-makers. What a ridiculous assertion it would be that there was some pro-Black echo-chamber effect in board rooms that are under criticism for having virtually no Black board members, right? Moreover, where are you getting their ideas or confidences in their beliefs from? You wouldn’t be just making it up?

How free from scrutiny corporate decision-makers should be in cases like this is the issue. Many people believe the heightened political divisions of our day don’t constitute a good reason for additional scrutiny. As I’ve written elsewhere, I believe they do. Under my proposal, if a corporate decision appears to be sufficiently politicized, then our lack of knowledge regarding the decision-making process becomes a reason for increased scrutiny, not a reason for continued insulation of the decision. Whether the decision in this case is objectively politicized enough to warrant additional scrutiny would be a question of fact. One might point to the fact that, according to at least one poll, 71% of Americans supported National Guard intervention in the riots (more on that poll here), while 62% do not strongly support BLM (assuming we can read failure to choose “strongly support” as “don’t strongly support”). Yet corporate decision-makers made strong statements in support of BLM while remaining silent on the riots. Finally, the echo-chamber I’m referring to is a progressive echo chamber — and it can be all white.

“– completely ignoring, if not being downright disdainful of, the views of the half of the country that believes law and order, blue lives, and black lives all matter?”

IZ- Again, it is unclear where you’re getting your facts from, I am unable any factual support for this. Also, I think you might want to check the poll numbers on people’s preferences. Moreover, supporting BLM and Civil rights for marginalized communities does not put you in opposition to law, order, or any other life. In fact many have quite intelligently and correctly pointed out that suggesting that supporting BLM and Civil Rights does put you in opposition is flat-out racist. Moreover, many have also correctly pointed out that alleging that one who supports BLM and Civil Rights supports riots is also in completely disregard of the gulf separating factual and disingenuously racist. Or consider this: “half” the country believes the world is flat, must board members take factor that unscientific argument into their decisions?

I agree that the numbers matter.  And someone can agree with my proposal for heightened scrutiny of politicized decisions without agreeing that such scrutiny is appropriate here. Assuming we adopted heightened scrutiny for facially politicized decisions, the costs of heightened scrutiny argue in favor of keeping the scope of triggering facts narrow. Having said that, I think the polling I’ve identified so far provides at least some support for my position in that it concludes 71% of Americans supported some type of National Guard intervention in the riots, while 62% were reported to not strongly support BLM (including almost 30% of blacks, and almost 70% of whites). Of course, those numbers could be wrong and/or I could be wrong about the relevant weight/interpretation of those numbers. In all this, it’s important to keep in mind that the heightened scrutiny I’m advocating for merely seeks affirmation that corporate decision-makers are informing themselves of all material information reasonably available. It does not require a particular outcome. In this case, evidence that available relevant polling was considered would arguably be sufficient to carry that burden, even if the decisions remain the same.

Furthermore, I agree that there is no necessary conflict between “supporting BLM and Civil rights for marginalized communities” and supporting “law, order, or any other life.” In fact, we should expect them to support each other. I also agree that racists would want to draw connections between BLM and the riots. However, I don’t agree that corporate decision-makers can ignore relevant public opinion, including the relevant concerns of well-intentioned non-racists who may be having a hard time separating the protests from the riots, however misguided those concerns might be. Accordingly, if half the country believes the world is flat, then corporate decision-makers absolutely have a duty to consider that information when making a decision to roll out a “world is round” campaign. In fact, if the board is made up exclusively of round-earthers, and they refuse to even consider the contrary public opinion of half the nation (assuming those people would otherwise reasonably be deemed potential customers), then they would be acting in bad faith.  The centrality of this point to my proposal is difficult to overstate. Critically, however, nothing requires them to shelve the campaign based on that information. They just need to fully inform themselves of all information reasonably available, and have a rational business purpose for their ultimate decision– which typically shouldn’t be hard to do.

“Such a conscious disregard of reasonably available material information would constitute not only a breach of their duty of care, but also bad faith.”

IZ- Well, as I’ve pointed out these “conscious disregards” would be impossible to prove and are only based on conjecture. Moreover, there is a duty of care to all members of the community, so supporting a group such as BLM and civil rights would be beneficial to all members, a rising tide raises all ships. Whereas disapproval of these groups might certainly fit your criterion as they are of benefit to exactly no one. Further, consider the ramifications of your approach-> would not every corporation face the exact same liability for putting their name on a College Football Bowl Game should a “riot” breakout?

An utter failure to properly inform oneself would suffice to support a finding of bad faith consistent with a conscious disregard of a known duty. If we shift the burden to corporate decision-makers to show that they properly informed themselves, and they are unable to carry that burden – that is sufficient. I certainly want the heightened scrutiny I propose to leave significant discretion to corporate decision-makers to appropriately consider the impact of decisions on stakeholders. Nothing I’m proposing should prevent corporate decision-makers from concluding that strong support for BLM is in the best interests of the corporation, while at the same time concluding silence on the riots is likewise best. The only way my proposal should interfere with those decisions is if the decision-makers failed to properly inform themselves.  Finally, the mere coincidence of a sponsorship decision and a riot would not trigger heightened scrutiny under my proposal.

I’ve finally gotten around to updating my SSRN page.  I would love to hear any comments you might have.

1.  Corporate Governance and the Omnipresent Specter of Political Bias: The Duty to Calculate ROI

2.  Totalitarian Nudges, Illusory Externalities, and Utopian Benefits: Reflections on the 34th Economics Institute for Law Professors

3.  Killing Corporations to Save Humans: How Corporate Personhood, Human Rights, and the Corporate Death Penalty Intersect

4.  The Helper Therapy Principle: Using the Power of Service to Save Addicts

So, this week we’re back to litigation-limiting corporate constitutive documents.

Where we last left things, the Delaware Supreme Court held in Salzberg v. Sciabacucchi, 2020 WL 1280785 (Del. Mar. 18, 2020), that Delaware law permits corporations to adopt charter provisions that would require plaintiffs bring Securities Act claims in a federal, rather than state, forum.  I posted about that decision here, and argued that it left a number of unanswered questions about its application.

This week, we’re beginning to see the fallout.

In Seafarers Pension Plan v. Bradway, the plaintiff brought a derivative Section 14(a) action against the Boeing Company in the Northern District of Illinois.  Plaintiff alleged that the company proxy statements contained false statements pertaining to the development of the 737 Max, and via these false proxy statements, defendants solicited shareholder votes in favor of their own reelection and compensation.

Boeing moved to dismiss on the ground that its bylaws provided that Delaware Chancery Court would be “the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Corporation,” as well as the sole forum for “any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of the Corporation to the Corporation.”

Significantly, because Section 14(a) claims cannot be brought in Delaware Chancery – federal courts have exclusive jurisdiction – Boeing’s argument meant that the plaintiff would not be able to maintain its suit at all.  As a result, the plaintiff argued that application of the bylaw to this lawsuit necessarily ran afoul of 15 U.S.C. § 78cc, which prohibits prospective waivers of 1934 Act obligations.

A parallel case, Chopp v. Bradway, 20-cv-00326-MN, involving derivative claims under Section 10(b), was filed in the District of Delaware.  Boeing made the same arguments in favor of dismissal in that case as well.  (Section 10(b) claims, like Section 14(a) claims, can only be brought in federal court).  The plaintiff voluntarily dismissed that action before a decision could be reached, leaving only Seafarers.

On June 8, the Seafarers court agreed with Boeing and dismissed the derivative Section 14(a) claims.  See Seafarers’ Pension Plan v. Bradway, No. 27, 19-cv-08095 (N.D. Ill. June 8, 2020).  The decision is not currently available on Lexis or Westlaw though I assume it will turn up eventually.

[More under the jump]

Continue Reading And the Salzberg v. Sciabacucchi fallout begins

Friend of the blog Bernard Sharfman has a new post up on the Oxford Business Law Blog, responding to Martin Lipton’s recent “On the Purpose of the Corporation” posts.  Bernie’s full post can be found here, and I’ve excerpted some portions (slightly out of  order) below.  I appreciate that the post highlights that a big part of the shareholder v. stakeholder debate is about whose rights are determined by contract v. fiduciary duties.

[T]he Lipton, Savitt, and Cain definition of corporate purpose is missing both an objective and a strategy on how it will create social value….

I am disappointed with this definition, a definition that ignores the social value created by for-profit businesses, namely the goods and services they produce; ignores that this social value is being produced for the financial benefit of its shareholders; and uses the pretense that uninformed institutional investors are partners in the management of a company….

[T]hey make no mention of the social value created by the corporation through the successful management of its stakeholder relationships, the goods and services it provides. How can a definition of corporate purpose not mention this? It’s as if a corporation should be ashamed of why it exists….

Pfizer, as a for-profit corporation, … has the legal obligation of looking out for the interests of its shareholders. This is the only stakeholder group that the board owes fiduciary duties to, who can sue the board for a breach of those duties, who can approve major corporate decisions, and who can initiate and implement a proxy contest to remove board members. Thus, shareholder wealth maximization is the objective of Pfizer’s social value creation….

[A] collective action problem in shareholder voting leads to uninformed institutional investors, resource-constrained investor stewardship teams and proxy advisors that cannot solve this problem, and the current lack of enforcement of an investment adviser’s fiduciary duties does not solve the additional problem of institutional investor bias in shareholder voting.

The 2020 National Business Law Scholars Conference will be hosted on Zoom on Thursday, June 18 and Friday, June 19.  Conference sessions include paper panels covering a variety of areas of business law and plenary sessions on several current topics of interest.  As is true for the in-person conference, no registration fee is required for attendance.

The conference will begin on Thursday at 9:00 am EDT with a plenary Q&A session entitled “Business Law in the COVID-19 Era” (focusing on the ways in which Business Law has impacted and been impacted by the pandemic in various academic and practice settings).  Thursday’s formal proceedings end with a second plenary Q&A session at 4:45 pm EDT, “Teaching Business Law: Applying What We Learned from Emergency Remote Teaching During the Pandemic,” featuring doctrinal and experiential (including clinical) business law faculty reflecting on their recent experiences teaching remotely on an emergency basis and the lessons learned from that experience that inform future teaching.  An informal virtual cocktail hour follows that program, beginning at approximately 6:15 pm EDT.

Friday’s sessions begin at 9:00 am EDT and end at 4:30 pm EDT.  The final program of the day is a plenary panel on “Bankruptcy and COVID-19” that begins at 3:00 pm EDT.  This panel includes judicial, practical, and academic perspectives an bankruptcy law changes, challenges, and opportunities during and related to the pandemic.

The full schedule for the conference with assigned Zoom meeting rooms will be available later this week or early next week.  A link will be posted here and shared on social media.  Although the networking opportunities will not be quite the same in the virtual format, the Planning Committee (listed below) is looking forward to a vibrant conference filled with significant opportunities to promote and forward valuable business law scholarship, teaching, and service.

2020 National Business Law Scholars Planning Committee
 
Afra Afsharipour (University of California, Davis, School of Law)
Tony Casey (The University of Chicago Law School)
Eric C. Chaffee (The University of Toledo College of Law)
Steven Davidoff Solomon (University of California, Berkeley School of Law)
Joan MacLeod Heminway (The University of Tennessee College of Law)
Kristin N. Johnson (Tulane University Law School)
Elizabeth Pollman (University of Pennsylvania Carey Law School)
Jeff Schwartz (University of Utah S.J. Quinney College of Law)
Megan Wischmeier Shaner (University of Oklahoma College of Law)

In doing a routine SSRN search, I’m always thrilled to see an exciting new banking article!  At the top of my “to read list” for this week is Michael Salib & Christina Parajon Skinner’s, Executive Override of Central Banks: A Comparison of the Legal Frameworks in the United States and the United Kingdom (here).  For a quick read, the authors have a post on the CLS Blue Sky Blog (here).  The article’s abstract is here:

This Article examines executive branch powers to “override” the decisions of an independent central bank. It focuses in particular on the power and authority of a nation’s executive branch to direct its central bank, thereby circumscribing canonical central bank independence. To investigate this issue, this Article compares two types of executive over- rides: those found in the United States, exercised by the U.S. Treasury (Treasury) over the U.S. Federal Reserve (the Fed), and those in the United Kingdom, exercised by Her Majesty’s Treasury (HM Treasury) over the Bank of England (the Bank). This Article finds that in the former, the power is informal and subject to minimal formal oversight, whereas in the latter, there are legal powers of executive override within an established and transparent legal framework.

This Article is the first piece of scholarship to undertake comparative analysis of the legal powers of executive override over these two leading central banks. The comparison is indeed striking—it juxtaposes the express, but limited, legal powers of HM Treasury to direct the Bank of England with the ad hoc and informal conventions of Treasury or presidential control of the Federal Reserve. The comparative analysis begs a paradoxical question in the conception of central bank independence: could a narrowly tailored set of override powers that authorize a treasury, with oversight from the legislature, to direct a central bank in exigent circumstances yield a sturdier form of central bank independence than a system which establishes few or limited legal mechanisms of executive override? Ultimately, this analysis prompts renewed examination of the way in which the law structures the Fed’s independence vis-a`-vis the Treasury and the President, informed by lessons from the U.K. design.     

So instead, I’ll just say, like my co-blogger Stefan who posted yesterday, I’ve also been paying attention to corporate responses to protest movement. Because we’re both talking about that subject, I’ll just start by quickly reproducing the links that I gave Stefan in my comments on his post:

Many Claim Extremists Are Sparking Protest Violence. But Which Extremists?

The Justice Department’s rhetoric focuses on antifa. Its indictments don’t.

Misinformation About George Floyd Protests Surges on Social Media

Twitter says fake “Antifa” account was run by white supremacists

And one I forgot to add:

Armed white residents lined Idaho streets amid ‘antifa’ protest fears. The leftist incursion was an online myth.

Anyhoo, as I said, I’ve been watching how corporations are responding, but unlike Stefan, I haven’t perceived silence at all – quite the opposite.  But, what corporations are saying is interesting.  These are the articles that captured my attention:

Corporate Voices Get Behind ‘Black Lives Matter’ Cause (“Some companies were more cautious in their approach. Target, which is based in Minneapolis and was hit by looting at a store there last week, described ‘a community in pain’ in a blog post but never mentioned the word ‘black.’”)

What CEOs Said About George Floyd’s Death (“Few companies talked about law enforcement or other forms of authority. Dell Technologies Inc. was the only company to use the words ‘police brutality.’”)

Adidas Voices Solidarity While Closing Its Stores (“Companies like Adidas and Nike have long paid black entertainers and athletes to pitch their products, and it is often black teenagers in the country’s largest cities who determine which brands are fashionable and subsequently sell big in the white suburbs. This is a particular bone of contention for black employees at Adidas…”)

#BlackoutTuesday: A Music Industry Protest Becomes a Social Media Moment (“Beyond the confluence of hashtags, some in the music industry questioned what was being done beyond promises for reflection and general statements of support.”)

‘Blackout Tuesday’ Prompts Debate About Activism and Entertainment (“Other celebrities voiced skepticism over the efforts and concern that it would dilute more urgent forms of activism.”)

Silent No More on Race, America’s CEOs Fumble for Right Words (“Unlike syrupy messages in support of nurses and essential workers fighting the coronavirus pandemic or a call for unity after 9/11, there is no happy medium for a position on white privilege.”)

Brands Have Nothing Real to Say About Racism (“Facebook and Citibank weighed in, as did the gay dating app Grindr and even the cartoon cat Garfield.”)

Ben & Jerry’s pointed call to ‘dismantle white supremacy’ stands out among tepid corporate America statements (N.B.: take a moment to absorb that this article appears in the Washington Post Food section)

People On Nextdoor Say The Platform Censored Their “Black Lives Matter” Posts (“while the company may be officially saying that it supports the Black Lives Matter movement, this week, many of its volunteer moderators took a contrary position, stifling conversations about race, police, and protests while removing comments and postings with the very phrase the company had tweeted just three days ago.”)

Venture firms rush to find ways to support Black founders and investors (“Black entrepreneurs and investors are questioning the motivations of these firms, given the weight of evidence that shows inaction in the face of historic inequality in the technology and venture capital industry.”)

SoftBank launches $100M+ Opportunity Growth Fund to invest in founders of color (“Just a couple of weeks ago, the CEO and founder of one of its portfolio companies, Banjo, resigned after it was revealed that he once had ties to the KKK.”)

For more equitable startup funding, the ‘money behind the money’ needs to be accountable, too (“Consider that already, most VCs today sign away their rights to invest in firearms or alcohol or tobacco when managing capital on behalf of the pension funds, universities and hospital systems that fund them. What if they also had to agree to invest a certain percentage of that capital to founding teams with members from underrepresented groups?”)

 

I’ll finish by noting that however tepid, many of the corporate statements do explicitly reference Black Lives Matter. And since even that sentiment was considered controversial a few years ago, we can safely conclude that the needle has moved. 

Corporations have appropriately been condemning racism recently, but where’s the condemnation of the riots?  Does the following excerpt from “Understanding Antifa” provide some answers?

California Governor Gavin Newsom was a pitch perfect Rousseauist when he recently said that the violent riots were not caused by individuals; instead he insisted, “Our institutions are responsible.” Many progressives are ambivalent about criticizing the violence of Antifa because they retain this sympathetic worldview. While all on the left are not active in violent revolution, many liberal mayors and governors struggle to condemn it outright….

Some additional excerpts that may be of interest:

The anarchism of Antifa embodies the revolutionary outlook, common in the West since the 18th century, that … assumes any violent spark that creates a popular uprising will usher in a utopian world of equality and justice….

 

Antifa does not offer a platform of positive change. In the fashion of Robespierre, they seek to overthrow “the privileged” and they assume that this violence and destruction will inflame an uprising that will usher in a pure democracy of equality….

 

In the view of Antifa, traditionally powerful groups, such as white men and capitalists, conspire to suppress the natural nobility of underrepresented citizens….

 

The current politics of Western democracies are so roiled and divisive because strident elements on the left have adopted this revolutionary outlook and traditionalist and populist parties of the right, some genuinely suspect and some very healthy, have sprung up to resist it.

UPDATE (6/6/20): The conversation continues here.

Alex Platt has a fascinating new paper arguing that the SEC should consider the potential private litigation consequences of their activities.  He starts with the observation that SEC enforcement and oversight activity undoubtedly influences the private securities class actions often following in the SEC’s wake. SEC enforcement can catalyze or inhibit these “piggybacked” private securities class actions in many different ways.  For example, the SEC’s enforcement division may catalyze private litigation by revealing facts either through the filing of a complaint or in a settlement agreement. An SEC decision to include an admission of wrongdoing in a settlement agreement would substantially advance private litigation. This process can allow private attorneys to discover, and later plead, facts critical to surviving a motion to dismiss.  The SEC’s Division of Corporation Finance now also catalyzes and inhibits private litigation through its comment letter process.  Consider how the SEC communicates its views to issuers.  Oral comments in a phone call leave no record for plaintiffs to cite in some later class action.  In contrast, a disclosed letter laying out the SEC’s reasoning may persuade a court that particular facts were material or that a defendant had scienter.  A decision to pick up the phone instead of writing a letter has real consequences.

Yet the SEC does not now account for these collateral consequences stemming from its activities–even though it has to actually know about them.  Platt points out that the SEC now regularly reports to Congress about enforcement but omits its true effects because the score sheet does not include private securities class actions catalyzed by SEC actions.  Adding these into the mix might give the SEC a reason to internalize the impact of its decisions.

As a former defense lawyer, I know that companies sometimes view SEC or state enforcement actions as a single front in a larger war which may be waged in state and federal courts across the country.  Companies might prefer to pay larger settlements to the SEC with carefully negotiated language to deny plaintiffs the factual ammunition they would need to withstand summary judgment or a motion to dismiss.  In this sense, a large SEC settlement might actually reduce a defendant’s overall liability.

Oddly, even though we know defense teams think about these issues, there does not seem to be any disclosed process for weighing these impacts at the SEC.  Putting a process in place to consider these impacts would likely result in more effective and judicious enforcement.